The crossroads of inflation and national security
The subject of inflation is hot, not just here in the United States, but across the European Union and around the world. US inflation hit an annual rate of 8.5% in March, a 40-year high. Globally, more than 60% of so-called advanced economies experience inflation rates above 5%, with the EU reaching 7.8%.
Optimistically, we entered 2022 with signs of a resilient global economy, with trade largely back to pre-pandemic levels and manufacturing and services sectors experiencing moderate expansion. Unfortunately, four months into 2022, we are facing record high inflation. Here in the United States, with GDP down at an annual rate of 1.4%, Americans are looking for leadership to address what has quickly become one of their greatest concerns.
Finding agreement among economists on the root causes of inflation or whether it is transitory or structural can be tantamount to getting congressional agreement on whether the sun has risen on a given day. However, the effect of inflation on working-class voters is clear, as recent polls show overwhelming numbers of Americans who rank inflation as a top concern. While the US Federal Reserve will focus on stabilizing inflation through monetary policy, for policymakers it is time to address the long-term risks to inflation.
There are three areas of risk contributing to inflation that are ripe for policy solutions with defined goals and accountability for results. We need the right leadership to address these risks: record energy price increases, skyrocketing shipping costs and misuse of trade policy – all of which are driving up costs for Americans, to weakening economic security and must be addressed holistically. .
One of the main drivers of soaring inflation in advanced economies is the continued rise in energy costs. The situation is most evident across Europe, where energy costs contribute 3 percentage points to the annual inflation rate. Compared to adding 2 percentage points to the annual inflation rate in the United States. What we see playing out in Europe is the cost of energy dependence on authoritarian rule and a reckless transition to non-fossil energy sources to meet climate goals.
The problem was presented as a problem with binary solutions – fossil fuels versus clean, renewable energy – instead of a problem with an array of solutions. Policymakers must balance economic security with concerns about global warming and recognize the strategic and incremental nature of the shift from fossil fuels to cleaner renewable energy sources. Change will not happen overnight, however, as we move towards emerging cleaner energy technologies, it is important not to sacrifice national and economic security. Technological advances should be encouraged, prioritizing investments in innovation such as hydrogen technologies and advanced small modular reactors. As technologies are developed and brought online, we must keep our economy strong through energy independence and not allow ourselves to be manipulated by authoritarian regimes.
Another important and often overlooked driver of inflation is the cost of transporting commodities. Due to increased demand and stubborn supply chains, the cost of eastbound transpacific shipping rates has increased 150% over the past year and more than 350% over the pre-COVID-19 period. According to the International Monetary Fund, inflation rises by around 0.7% when freight rates double, and the effects typically last longer than 18 months. The impact on inflation this year is already estimated at 1.5%.
From a national security perspective, consider the following maritime trade statistics: 23 million jobs in the United States, $4.6 trillion in economic activity, and more than 90% of U.S. imports enter and leave by ship . It’s no wonder that our economic resilience and national security are tied to the health of our ports, the US Navy and Coast Guard, and the US Merchant Navy. Given the importance of maritime transport to the economy and national security, it is worrying that less than 2% of the country’s waterborne imports and exports are transported on US-flagged vessels and that less than 200 of 44,000 current ocean freighters are American. While the People’s Republic of China has both the largest army and the largest fleet of ocean freighters.
Ensuring open trade routes requires a viable navy, trade fleet, and merchant navies. The debate shouldn’t be whether we need the Jones Act, the Maritime Security Program, or Cargo Preferences — which are the law and policies that seek to ensure the continued existence of American shipping — but how they should be. implemented in the future. One approach to dealing with the risks of shipping goods in a global economy is to expand freight preferences in a phased approach. Initially, we should require that all US government cargo be carried on US owned vessels and with US crews and over time we will expand further to require the same for a certain percentage of the American trade. This would encourage sustained growth in the U.S. commercial fleet and the ranks of commercial seafarers while reducing shipping disruptions and mitigating volatility in the international shipping market.
The misuse of trade policy, particularly in the enforcement of anti-dumping legislation, is probably the least contributing factor to inflation. Yet these abuses not only contribute to inflation, but also weaken domestic competition and erode international relations with allies and partner countries. Every year, the US court system generates dozens of remands ordering the US Department of Commerce to change its assumptions, methodologies or calculations. These serve as evidence of the routine abuse of discretion granted to Commerce, which assumes the role of judge, jury and executioner – while serving as a consultant to domestic industries filing claims.
Under anti-dumping law, dumping is defined as the sale of a commodity by a foreign company in the United States at less than market value to win contracts, lock in a supplier, or even drive competitors out of the business. The origins of modern anti-dumping laws and agreements can be traced back to post-World War II and the negotiations of the General Agreement on Tariffs and Trade, where US negotiators insisted that anti-dumping be included in order to encourage more comprehensive trade liberalization. Over the years, U.S. anti-dumping policy has evolved to become more accessible and rewarding to U.S. import-competing industries, culminating in the practice of “special market circumstances” and the latest reform formulation. of trade remedy law contained in the House bill “America COMPETES Act” which authorizes successive rounds of anti-dumping based on a flawed Commerce Department process and an untenable bar of “causing significant harm”.
In the case of anti-dumping, the law itself, not unfair trade, creates an unequal playing field. The law has become a trade weapon used by American companies against other American companies and is partly responsible for the rising costs. Waiting for action from the judiciary has proven futile because its standards of administrative deference preclude any action. Instead, it is up to Congress to feel obligated to provide some fixed or intelligible principle limiting the exercise of executive discretion in this case. Otherwise, the current trajectory will only erode domestic competition, harm our global economy, and weaken our national security. Congress should reject the reform of trade remedy law contained in the America COMPETES Act and seek to strengthen the intelligible principle by which Commerce exercises anti-dumping regulation.
Fighting inflation through monetary policy is a short-term solution requiring periodic corrections, however, this approach does not address underlying vulnerabilities in the US economy. Taking action to address these national security challenges today will lay the foundation for a stronger economy tomorrow. Peace through strength in today’s global economy must include a plan to build economic resilience and it is a policy that resonates with ordinary Americans.
Brian Cavanaugh is senior vice president at American Global Strategies LLC. He served as Special Assistant to the President and Senior Director of the United States National Security Council, 2018-2021.